Haralson v. E.F. Hutton Group, Inc.
| Decision Date | 26 December 1990 |
| Docket Number | No. 88-2999,88-2999 |
| Citation | 919 F.2d 1014 |
| Parties | Fed. Sec. L. Rep. P 95,739, 14 UCC Rep.Serv.2d 336 J.B. HARALSON, et al., Plaintiffs-Appellees, Cross-Appellants, v. The E.F. HUTTON GROUP, INC., et al., Defendants-Appellants, Cross-Appellees. The E.F. HUTTON GROUP, INC., et al., Plaintiffs-Appellants, Cross-Appellees, v. George J. AUBIN, et al., Defendants-Appellees, Cross-Appellants. |
| Court | U.S. Court of Appeals — Fifth Circuit |
David G. Russell, Jamie Brownlee-Jordan, Parker, Hudson, Rainer & Dobbs, Atlanta, Ga., for Hutton, et al.
Charles Kipple, Saccomanno & Clegg, Clinard J. Hanby, Houston, Tex., for Grant.
Michael A. Caddell, Houston, Tex., for Haralson, RBI & IBR, Aubin, etc.
Appeals from the United States District Court for the Southern District of Texas.
Before REAVLEY, DUHE and WIENER, Circuit Judges.
The E.F. Hutton Group Inc. ("Hutton Group") and its securities and commodities brokerage subsidiary, E.F. Hutton & Co. Inc. ("Hutton Company") (Hutton Group and Hutton Company collectively "Hutton") sued George J. Aubin, his wife Cameron E. Aubin, several trading companies owned by George Aubin, John B. Haralson, Caren C. Grant, IBR, Inc., and RBI, Inc. (collectively "the Aubin parties") to recover approximately $60 million under multifarious theories, including common law and securities fraud, fraudulent transfer of assets, breach of contract, tortious interference, civil conspiracy, unjust enrichment, and rescission. Hutton's allegations stem from a complex series of transactions wherein Hutton accepted the prospective proceeds from the sale of Ben Milam Savings & Loan Association ("Milam") and Mercury Savings Association ("Mercury") (collectively "the S&Ls") as security for a loan to RBI. RBI never repaid Hutton, and the Federal Home Loan Bank Board ("FHLBB") declared the S&Ls insolvent. The Aubin parties also sued Hutton, contending that Hutton was responsible for the S&Ls' conservatorship, and seeking damages from Hutton based on usury, breach of contract, breach of fiduciary duty, tortious interference, etc. The cases were consolidated in the Southern District of Texas.
After two years of discovery battles and six days of summary judgment hearings, the district court decided the entire case on summary judgment motions. We affirm the district court's summary judgment against RBI for $58,524,128.20. We also affirm the court's summary judgment that the Aubin parties take nothing of Hutton. But because we find triable issues of fact on (1) some of Hutton's primary and secondary securities fraud claims against the Aubin parties, (2) Hutton's breach of contract claim against Haralson, (3) Hutton's tortious interference claim against Aubin, and (4) Hutton's civil conspiracy claim against Grant and Aubin, we reverse the district court's summary judgment that Hutton take nothing of the Aubin parties and remand this case for proceedings consistent with this opinion.
In the early 1980's, Don Sanders was Hutton Company's largest producer of trading revenues and was on its board of directors. He and John Mundy, another Hutton account executive who dealt solely with wealthy Texas individuals, worked in Houston isolated from Hutton's other Houston employees. George Aubin commonly executed multi-million dollar stock and commodity transactions through the satellite office run by Sanders and Mundy, generating millions of dollars in trading commissions annually that were split among Hutton, Sanders, and Mundy. By 1983, Sanders had been Aubin's stockbroker for over ten years and the two were good friends.
In early 1983, Haralson acquired the S&Ls. Aubin assisted Haralson, at least, in analyzing the S&Ls' business records and structuring the financing for the purchases. Later, Sanders approached the management of Hutton Group on behalf of the S&Ls and requested that Hutton act as agent for an undisclosed principal in purchasing the assets of two mortgage companies, Baldwin United and the Fort Wayne Mortgage Company. Although it is highly unusual for Hutton to make such purchases, it accepted the deal presented by Sanders and assigned the task to Paul J. Yang, a First Vice President in Hutton Group's merger and acquisition section. Hutton made the purchase toward the end of 1983, but both sellers sued Hutton for fraud once they found out that the S&Ls were the real purchasers. Hutton and Aubin defended a lawsuit brought by Fort Wayne's seller through mid-1985.
On September 19, 1984 the Texas Savings and Loan Department ("TS&LD") issued a cease and desist order to both Mercury and Milam, citing violations of law and unsafe and unsound lending practices. Rather than litigate the order's propriety, Haralson settled with the TS&LD and placed the S&Ls under TS&LD supervision pursuant to the "Supervisory Agreement." In two key provisions, this agreement required that Haralson divest himself of all incidences of ownership in the S&Ls within a time set by the TS&LD, and that the S&Ls terminate all business relationships with Aubin.
Sanders again went to Hutton Group's management on behalf of Aubin and Haralson, requesting that Hutton act as broker for the sale of the S&Ls. Yang was skeptical about this deal because the previous dealings with Aubin and Haralson had led to litigation. Yang also believed that the previous associations with Aubin and Haralson injured Hutton's investment banking reputation. Hutton Group's management sided with Sanders despite Yang's protests, but assigned Yang to spearhead Hutton's investment banking team for the S&Ls. Yang understood that he was to work exclusively with Aubin in selling the S&Ls and that, however inconsistent, Aubin was also trying to sell the S&Ls independent of Hutton.
Yang's team, consisting of three Hutton financial analysts with MBA degrees, gathered and reviewed data at the S&Ls' Houston offices from October 1984 to January 1985. Their efforts were often frustrated by the inaccurate information that Aubin supplied and the critical information he withheld. Even so, Yang's team compiled a two-volume offering memorandum for the S&Ls by the end of January 1985. According to Hutton, it is industry practice for investment bankers to disclaim the accuracy and completeness of such memoranda, and Hutton did so. By February 1985, Aubin identified a potential buyer by the name of Southmark Corporation.
Meanwhile, Aubin was engaged in substantial securities and commodities trading through ten corporate accounts administered by Sanders and Mundy (the "Accounts"). These three people devised a secret scheme whereby Aubin could keep trading even though he was unable to meet the margin calls on the Accounts. Day trade calls were waived unless there was a deficit position, but the positive positions were paid immediately. Aubin received prepayments of commodities gains on demand while receiving at least six extensions on the payment of due margin losses.
This scheme abruptly ended as Aubin's trading losses approached $46 million in February 1985. Sanders demanded payment of this amount, and Aubin wrote Hutton approximately 25 corporate checks between February 28 and March 4. Banks dishonored all of these checks, but not before Hutton issued $11 million in checks to Aubin for gains that occurred in some of the Accounts. Aubin deposited Hutton's checks in his corporate checking accounts at Mercury. After Mercury credited Aubin's corporate accounts, Hutton stopped payment on the checks, leaving Mercury with an $11 million loss.
Aubin executed personal guaranties on some of the Accounts. He was therefore personally liable to Hutton for approximately half of his aggregate losses in the beginning of March 1985.
On March 8, 1985, Aubin and an attorney ostensibly representing Haralson, Richard Fuqua, went to New York to discuss the trading losses with four Hutton officials: Thomas P. Lynch, Hutton Group President and Vice-Chairman of Hutton's board of directors; Scott Pierce, President of Hutton Company; Thomas Rae, Hutton's General Counsel; and Robert Witt, Hutton's Director and Vice President of Marketing. During approximately one hour of negotiations, these parties discussed funding Aubin's trading losses with proceeds from the S&Ls' imminent sale to Southmark. Both Haralson and Aubin refused to personally guarantee repayment of any money to be advanced by Hutton through this agreement.
The day before these negotiations, the four Hutton executives contacted Yang regarding the S&Ls' value. Yang told them that he thought the S&Ls would sell for $80-100 million, but that his estimates were subject to revision after a close review of the S&Ls' loan portfolios. Yang advised Hutton's executives to secure any loan to Aubin with Haralson's stock in both S&Ls.
After the March 8 morning negotiations, Lynch and Fuqua finalized an agreement wherein Hutton Group would provide credit to correct the Accounts' deficit balances. On the evening of March 8, Haralson and Winston Woo, President of RBI, Inc. and Chief Financial Officer of the S&Ls, arrived to sign the "Facility Agreement" with Hutton's Lynch.
This agreement obligated Hutton Group to immediately advance to Hutton Company "such amounts as are necessary to satisfy existing deficiencies, if any, and margin requirements relating to [the Accounts]." Hutton Group also agreed to cause Hutton Company to honor the $11 million in checks stuck at Mercury.
Any funds that Hutton Group advanced Hutton Company under the Facility Agreement were to be repaid one year later by RBI, Inc. pursuant to a promissory note (the "Note") that RBI executed with the Facility Agreement. The Note represents RBI's unconditional promise to pay Hutton up to $60 million plus interest for funds advanced under the Facility Agreement.
RBI is a wholly-owned subsidiary of IBR, Inc., in which Haralson has a 90% controlling interest. Haralson...
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